How quickly hope can sour. That is, if it is based on suspect assumptions and a misreading of the general situation. It would then be more like irrational pleading than derived from solid analysis.
One year ago, thereabouts, President Trump delivered upon one campaign pledge. He pushed a tax reform bill through Congress aiming to offer benefits to both the supply and demand sides of the economy, workers and businesses alike.
And just as I promised the American people from this podium 11 months ago, we enacted the biggest tax cuts and reforms in American history. Our massive tax cuts provide tremendous relief for the middle class and small business.
Initial reactions from Economists were quite positive (excluding those who are strictly partisan carnival barkers). Estimates varied as they always will with something new, but one widely cited expectation from the Heritage Foundation started the law off with positivity and optimism.
We project that the final bill will increase the level of gross domestic product (GDP) in the long run by 2.2 percent. To put that number in perspective, the increase in GDP translates into an increase of just under $3,000 per household. Though we only estimate the change in GDP over the long run, most of the increase in GDP would likely occur within the 10-year budget window.
These numbers didn’t mean Heritage’s statisticians were projecting an additional $3k in the average American’s paycheck, just that there was supposed to be $3k per household in economic benefits spread out across the whole system – in the long run. In other words, there should definitely have been some significant benefit which workers as consumers would see for their own purposes.
There is some evidence the tax cuts did have an immediate effect, but increasingly it appears to have been short-lived no matter the debate. For a few months, spending seemed to rise, perhaps due to the payroll tax rollback though it may just as much have been attributable to gasoline prices. In the end, it doesn’t seem to have mattered either way, a bitter proposition befitting the spreading disappointment that is 2018.
The Tax Cuts and Jobs Act that President Trump signed a year ago seems to have boosted economic growth in 2018. But there’s little evidence yet that it’s setting up the U.S. economy for faster growth over the longer term, which is what the White House and the legislation’s backers in Congress promised.
The latest retail sales numbers for November 2018, released by the Census Bureau today, are clear only on the last part. Consumer spending has stalled, driven back toward more recession-like levels of spending. Historically, during an actually healthy economy, US retail sales will expand consistently between 6% and 9% each and every month. A truly good month will see double digits. Six percent equals a bad month.
And 3% is what we find during mild recessions like the one in 2001.
Over the past year, several months have reached 6%, even one month (May 2018) just 3 bips shy of 7%. It was never anything more, however, and those all coincided with the jump in gasoline prices just as they correlated with the benefits of tax reform.
Since May, a period now extended half a year, retail sales are much closer to recession than the lower margins of health. Unadjusted, total sales rose just 4.86% in November year-over-year, +4.5% excluding retail sales recorded at gasoline stations.
Over the past three months, just as the Christmas shopping season really kicks in, there are a few indications that consumer spending is already slowing further. Retail sales in those months were up just 3.8% over the same three months in 2017, compared to 5.2% growth last year over the same months in 2016.
If there was weather related weakness in September 2018’s retail sales environment, it was “paid back” in October. Therefore, putting those two together with November and a big chunk of the Christmas season, 3.8% is very concerning especially given the tax cuts as well as the expectations for them.
In my view, I don’t believe they helped at all. I see no evidence for them on this demand side. The rise in growth rates to closer to 6% when compared to the upswing in 2014 was really oil prices more than anything. All those almost “good” months of retail sales during 2018 were those when the annual rate of change in oil prices, therefore gas prices, therefore the sales at gasoline stations were the highest.
Excluding the oil base effect, consumer spending throughout 2018 has consistently underperformed the ultimately unacceptable upturn during 2014 – and not really that much of an improvement over what was nearly a recession in 2015 and 2016. In fact, excluding gasoline, retail sales throughout Reflation #3 were pretty much the same level as during the slowdown/downturn in 2012 and 2013 following Euro$ #2. This curious lethargy continued forward well after the passage of the reform bill.
This is one reason why I believe we’ve seen the growing rift between Fed Chairman Jay Powell and the President who only thirteen months ago nominated him, and supported that nomination through well past his first day in office in February 2018. There are some in the government, take my word for it, who realize that they did these tax cuts along with deregulation and the growth that was supposed to follow really never did.
On the one hand, this should never have been surprising; did no one remember ARRA and the mockery the word “stimulus” became? Doing more of the same things unsurprisingly produced the same results – nothing. Proponents for each one will proclaim that theirs was different, as if Republican “stimulus” doesn’t deserve the quotes that Democrat “stimulus” did. They are all the same thing, of the same type.
The more immediate problem is how quickly decoupling disappeared. So long as gasoline and oil were moving higher, the was at least a façade for those to keep on suggesting a US boom in the face of “overseas turmoil.” That turmoil doesn’t seem so far overseas now, not just curve inversions and shaky markets but in economic terms, too (anyone see the US PMI’s today?)
Over the long run, this could be a good thing; not in the sense of Heritage’s dubious $3k regressed central tendency but for discrediting this kind of policy appeal. Tax cuts can be and often are very good things on their own terms, but they cannot answer for this particular stubborn economic case. Like the circus of QE, that much has been proven.
It is global, ladies and gentlemen, and politicians of every party and nationality need to look way beyond the orthodox – and into the word “offshore.”